Weekly Update - 6 November 2017 (UK/Europe)

Global equity markets rose over the week supported by encouraging corporate earnings and economic data in major economies. All the regions generated positive returns both in local currency and sterling terms. The MSCI AC World Index rose 0.6% in local currency terms and 1.0% in sterling terms. Asia Pacific (ex-Japan) region was the best performer both in local currency terms (1.5%) and sterling terms (2.2%), helped by Korean equity returns on the back of strong Q3 earnings by index-heavyweight Samsung electronics. The US returned the least both in local currency terms (0.3%) and sterling terms (0.6%) but still reached record highs.

Despite last week’s interest rate hike, UK gilt yields fell across all maturities as the accompanying Monetary Policy Statement was perceived as dovish (favouring low interest rates). The 10 year UK gilt yield fell by 9bps to 1.31% and the 20 year UK gilt yield fell by 7bps to 1.85% over the week. The 10 year US treasury yield fell by 8bps to 2.34% in a week when Donald Trump nominated Jerome Powell as the next US Federal Reserve chairman. Powell is expected to maintain market-friendly, monetary policy continuity. European government bonds rallied for the second successive week. Both German bund and French government bond yields fell by 2bps to 0.37% and 0.62% respectively. Greek bond yields fell by 37bps to 5.00% on the back of news that the government is planning a debt-swap programme to boost liquidity. Italian government bond yields fell by 16bps to 1.74% as Standard & Poor’s upgraded the sovereign credit rating of the country.

UK real yields fell over the week. The 20 year real yield fell by 7bps to -1.58% and the Over 5 year real yield fell by 6bps to 1.56%. 20 year breakeven inflation was unchanged at 3.34%.

The US high yield bond spread over US treasury yields rose by 8bps to 352bps. The spread of USD denominated EM debt over US treasury yields finished the week 9bps higher at 291bps. The sterling non-gilt spread over government yields (based on the Merrill Lynch index) fell by 1bp to 102bps.

The S&P GSCI rose by 0.9% in USD terms over the week. The energy sector rose by 0.8%as the price of Brent crude oil increased by 0.5% to $61/BBL. Industrial metals rose by 1.5%as copper prices increased by 0.9% to $6,865/MT. Agricultural prices rose by 0.1% whilst gold prices fell by 0.1% to $1,268/ounce.

Sterling depreciated against major currencies, with exception of the yen over the week. The US dollar appreciated by 0.3% against sterling, ending the week at $1.31/£. The euro strengthened by 0.6% against sterling to finish the week at €1.12/£. The Japanese yen depreciated by 0.4% against the US dollar, ending the week at ¥114.26/$.

ECONOMIC RELEASES

The US labour market rebounded following a hurricane-hampered September jobs report. Although missing expectations of a 313k increase, the US economy added 261k jobs in October, up from a revised 18k increase in the previous month. The unemployment rate was able to beat expectations and move from 4.2% to 4.1% due to a lower than anticipated participation rate. However, wage growth failed to materialise. Average hourly earnings slowed more than expected to 2.4% in the year to October, down from 2.8% and below consensus estimates of 2.7%. Elsewhere, the manufacturing sector looked to have cooled with the Institute of Supply Management's manufacturing index missing expectations of 59.5 and slipping to 58.7 from 60.8. Consumer confidence was more resilient, as the Conference Board’s measure increased by 5.3 points to 125.9, the highest level in almost seventeen years.

In the UK, the manufacturing Purchasing Managers’ Index (PMI) unexpectedly increased by 0.3 points to 56.3. The services PMI similarly exceeded forecasts as it advanced to 55.6 from 53.6. The construction sector, meanwhile, also rebounded in October as its PMI moved back into expansionary territory to 50.8 from 48.1. House prices moved higher with the Nationwide House Price Index rising by 2.5% in the year to October; up from 2.3% in the previous month and above forecasts of 2.2% growth. Although expected, the one blemish to an otherwise positive set of releases came in the shape of the GfK’s consumer confidence measure which slipped back to -10 from -9.

The advance reading for Eurozone GDP growth in the year to September 2017 was 2.5%, above the previous reading of 2.3% and the forecasted 2.4% increase. The unemployment rate edged down from 9.0% to 8.9%; the first time the rate has fallen below the 9.0% mark since 2009. There was further positive news as the European Commission’s monthly measure of economic confidence rose to its highest level since January 2001. The index increased to 114.0 from a revised 113.1. Consumer price inflation, however, remained stubbornly below the European Central Bank’s 2.0% target, as it slowed to 1.4% from 1.5%in the year to October. Inflation in Germany similarly failed to meet expectations of 1.7%, slowing to 1.6% from 1.8%.

In Japan, the provisional release for industrial production growth showed a decline of 1.1%in September, down from the 2.0% increase seen in August. Both the jobless rate and job-to-applicant ratio remained unchanged at 2.8% and 1.52 respectively in September. The final reading for the Nikkei manufacturing PMI was revised upwards to 52.8 in October from 52.5. Retail sales rose by 2.2% over the year to September (marginally missing the consensus estimate of a 2.3% increase), following revised 1.8% growth in August.

The official Chinese manufacturing PMI came in lower at 51.6 from 52.4 and below forecasts of a more modest decrease to 52.0. The non-manufacturing PMI slipped 1.1 point lower to 54.3. However, the two indices suggest that both sectors remain in expansionary territory. The Caixin manufacturing PMI, which focuses more on small and mid-sized businesses, met estimates and was unchanged at 51.0. The services sector accelerated with the non-manufacturing index increasing by 0.6 points to 51.2.

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